David Hargreaves sees trouble ahead with the extension of the so-called 'bright line' test on property transactions

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By David Hargreaves

Bring on a comprehensive capital gains tax, I say.

That's not meant to be quite as zealous as it perhaps sounds. I just would like clarity.

The thing is, we seem to be getting ourselves into a strange position where - without ever saying we are having a Capital Gains Tax - we are, de facto, getting one by another name. And it is one that could in my view produce distortions and unintended consequences far worse than the "full Monty" CGT might.

We are trying, in a term once beloved of our politicians (but perhaps under the circumstances not at the moment) to be 'a little bit pregnant'; that is, let's have something that behaves like a Capital Gains Tax in certain circumstances but don't for goodness sake let us call it that.

'Labour will tax you'

I do blame the politicians on this. National in particular with its "woooooooo, Labour will tax youuuuuu!" constant refrains across the last three election campaigns has helped spread a climate of irrational fear towards anything that begins with a 'T" - and add a 'C' and a 'G' in front of that and oh, dear.

So it was that when National in 2015 introduced Capital Gains Tax in panicky response to public pressure over the searing hot housing market it did it in disguise. Under the sunny sounding, euphemistic 'bright line' moniker, so, was born the Capital Gains Tax that dare not speak its name. Except it is not a fully formed comprehensive CGT. It's a patched up job with its origins in cynical political expediency.

During the last election campaign Labour, having seen the way the electorate started running when it suggested CGT might be on the agenda in this term of Parliament, did the big u-turn, saying the tax would not be on the agenda this term. But might next one.

It has optied instead to extend the bright line test out from the original two years to now five years.

A CGT by its real name must wait on the recently established Tax Working Group, which is due to report back early next year. In all probability it WILL recommend a CGT since that's effectively the whole way in which it has been set up, with terms of reference that really lead only in one direction.

So, then next election we will likely get Labour recommending that it will introduce the tax if elected in 2020, while National will, I would hazard a guess, spend most of the next campaign saying something like: "Woooooooo, Labour will tax youuuuu!"

It then becomes effectively a referendum. To CGT or not to CGT?

New Zealand has been beating about the proverbial bush on this issue for years. It is high time that we decide: Either we do (have a CGT) it or we don't. But let's not start developing a proliferation of horrible, halfway house measures that avoid using the CGT stigma but in effect do the same thing - just more messily.

Legislation that 'tinkers' is always a worry. And I'm really not sure that the decision to increase the term of the so-called 'bright line' test to five years has been properly thought through at all.

If it comes to that, I don't think the original introduction of the bright line test in 2015 (with a two-year term) was particularly well thought-through either. The supporting impact statements etc at the time suggested that the then National Government did it all in a tearing hurry.

It didn't matter as much with a two year term. But five years is quite a long time. It is long enough for the unintended - and unfair - consequences to be quite serious.

Consider the hypothetical, but all too possible case of a married couple who buy an investment property. Within six months one of them gets sick and dies. Previously it was pretty clear what would happen. The surviving partner in all probability sells up and rationalises. What about under the new five year bright line test though? Suddenly our surviving partner is faced with two unappetising choices: Sell up and get taxed, or grit teeth and hold on to the property, probably with near term adverse financial consequences, for another four years or so.

And it doesn't have to be a death. Unexpected pregnancy. Job loss. Long term illness. Oh, and heaven forbid anybody should simply want to change their minds.

As the regulatory impact statement prepared for the extension of the bright line test describes, the consequences of the five-year term are not all about if a property is sold. The impact of people who would, left to their own devices, sell but who don't because they want to avoid being taxed could also be felt. Houses that would naturally otherwise go on the market, will not. That's another unintended consequence that could distort the market.

Getting caught

It is difficult to tell at this stage how many people might get caught by this new five year term, by these unintended consequences. But I reckon the numbers would be significant. And it is unfair.

Clearly one way around this would be to allow exemptions in special circumstance. But that would get complicated and they are not going down that path.

The thing is, I fear that people will not be sufficiently cognisant of the risks this new five year test carries. I think a lot of people will already have been caught before they realise there's even a danger of being caught.

With a comprehensive Capital Gains Tax I just think there would be much greater clarity and less scope for potentially unfair outcomes. And everybody you would imagine would be fully aware of what a CGT means and the ramifications.

If the electorate in 2020 gives the thumbs down to a full CGT, then we will be stuck with the bright line test until or unless someone decides to get rid of it.

More halfway houses?

And what about the possibility that in the absence of a full-blown, 'real' CGT we get more halfway houses like the bright line test? It could all become a mess.

I would actually prefer that we did not see the bright line test extended. In fact I would like to see it gone.

As I said at the top, I think the pragmatic choice here is to go the full CGT.

And if we could ban all politicians on ever again using tax as an election weapon that would be good too. That's possibly a bit unlikely though.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Agreed. If the intention is murky as bro...and it is. Just make it any claim of tax offset equals capital gains tax must applies. Tax offset taints property and all assets in holding entity. Personally picking the tax offset to have been a much larger motivator similar to free capital gains.

One of the problems is that tax is a driver in any purchase decision of property. Removing or nullifying it potentially has an impact that would be devastating to prices and the inevitable impacts on consumer spending--the key driver of the NZ economy. It also is detrimental to the banking sector, which has probably the easiest ROI in NZ ('money for nothing' by issuing mortgages from its monopolistic power and right to do so).

Some of the scenarios you say are unfair don’t strike me as unfair. e.g. the couple where one gets sick. They bought an investment property to make money - let’s be honest, primarily capital gains, one of them got sick, they sold the investment property and make a capital gain. They make $100,000 (for ease of maths). They have to pay tax of 33% and therefore only get 66%. Sounds fair to me.

Now you might say what about the unfairness versus shares. If they bought shares and sold in same situation then they pay no capital gain.

This doesn’t prove it’s unfair anymore than me saying I pay tax on wages and that is therefore unfair by same logic. In the economy some gains are taxed while others aren’t. None of it is objectively fair or unfair unless all income is taxed on the same basis which it isn’t. Therefore since the present system is inherently unfair it is neither made better or worse by such a change, just different.

I meant to say, I’m sick of proposed changes to the tax system getting waylaid by strange low probability examples e.g. people owning holiday homes - my heart bleeds for people rich enough to own a extra house just for leisure, it really does. The present system is demonstrably unfair and changes to it will produce winners and losers. If the standard is that no change can disadvantage any one person unfairly, we will never improve the system. The test should be does the change on balance make the system more fair. I argue that extending the bright line test to 5 years meets this test.

But the inability to move an electorate is a mark of inexperience in politics, so maybe next term it might be possible. If we didn't have such a black and white political divide they could make a deal with National and all of them do what is best for the country.

I I’d argue it’s symptimatic of the electorates inability to vote in their own best interest. When it comes to tax, voters often vote for a tax system which is disadvantageous to them. Michael Moore (the director not the PM) once said poor people vote for tax cuts for the rich because they hope to be rich one day.

Another incentive removed for people to be landlords.
watch out what you wish for, the taxpayer will have to be the landlord. In the past the govt has not been good at it and has been keen to encourage private enterprise to do the landlording.

I don't have a problem with higher taxes.. so long as they are well spent. I'd rather see the govt tax me & you a bit more and build housing nz houses, and stop paying out accomodation supplements for one. Having just returned from USA i'd rather avoid anything that moves us in that direction.

This is another cost put on the locals to subsidize immigrants.
Just shut the door. No more housing crises. No more foreign investors. NZ for NZ'ers.
We give away free shares in our infrastructure to each immigrant stepping off the plane. The infrastructure is now overwhelmed so the govt is looking for new taxes.

Incorrect a CGT can simply be imposed at the will of Parliament. Hhowever, from what I recall that was the commitment made (by Labour?)

Also TOP promised that with such tax changes 80% of people would be better off and the abuse they received from that was just unreal.

Sadly there are too many people that a) are living off tax free gains and dont want to change that and/or b) dont trust the Government (and in some ways I cant blame them) As a result the "rich" who pretty much live off capital gain do so tax free at the expense of the majority PAYer's , leaves me wondering who's the bigger fool here. Some ppl who pay nox tax must be laughing at us PAYers stupidity hugely.

Dropping GST or greatly reducing it makes the most sense IMHO. Not only do you reduce or stop a regressive tax you also take away a big slice of IRD time and hence the numbers workers needed in administering GST. and the 3rd win is businesses should have a big reduction in compliance costs. All this swapped into a simple CGT / land tax.

Houseworks, your suggesting there are two taxes. Once gains realized on the sale of a property within two years and also with the intent on selling established, your saying the vendor could potentially be taxed twice?

Surely not.

The Brightline just saves the IRD the need to assess the vendors original intent and apply a CGT on gains made.

I think eventually the 5year bright-line will be replaced by full cgt. Sorry to say. Also the new 5 year rule would apply to properties purchased after its introduction and not be backdated. This article alludes to vendors holding back properties until the bright-line date passes and I think that could be a problem for those wanting to buy.

I agree that a full blown CGT is creeping closer. It's unlikely to involve any backdating therefore there will be little revenue gained from its introduction in this market! It would be useful if the full CGT has an abatement built in depending on how many years the property is held. Say it dropped off altogether after say 10-15 years.

It makes sense that vendors could hold off listing if the Brightline is extended however, if the market did tank, confidence in future gains completely collapsed and fear took over then a lot of vendors might list in a quest to save their financial backsides.

It took 15 years for Australia to see any significant revenue from CGT. Coming off current high base prices now here, it would be a similar time frame. It is incredibly complex and needs to allow for deductible costs and inflation adjustments. And if it doesn't include the family home, there is still scope for wealthy people to sell expensive homes to each other with no tax on the gain. Family farms and businesses would also be tricky. In Australia you have to consider sales of any CGT asset you own including shares, art and jewellery. All assets have to be included in a CGT, or it changes investment incentives. Years of new chargeable work for accountants and lawyers, with no proven reduction in the price of houses anywhere it's been tried. Many of the commenters on this site have no idea about what a massive change in our taxes this would be.

David I don't really see a problem here.
They will only be taxed if there is capital gain. If the gain is small the tax will be small, if the gain is moderate the tax will be moderate etc etc.
My point being - they will only lose a part of their gain, they still retain the bulk of their gain

The problem is there seem to be enough voters who do not wish to pay any tax on their capital gains that a political party (basically Labour) who suggests it becomes un-electable.

Even when TOP pointed out 80% of those paying CGT/land tax would be better off under TOPs even more radical proposal as other taxes would drop they still got hammered by the ignorant and greedy saying NO in CAPS.

So what options are there? Bear in mind National still got 45% of the vote even after 3 "un-popular" terms. I suspect that even if the National caucus was stupid enough to vote in an extreme right winger like Judith Collins that she could win easily if Labour tried to bring in a GCT, so no options really IMHO.

To tax or Not to tax is the question then .... so far most NZers have given it the thumbs down and any party driving the idea was shot down in flames ...Will there be a different outcome in 2020 if that was tabled again? ...I Doubt it very much.

This proposed extension came as a result of ill thought auction like policy dishing in the heat of the election campaign ... just like most other silly policies being now watered down and diluted, Labour thought let's bid as long as it is an auction ... will shall make it bigger, longer, easier, more, and free .. and have nothing to lose !!

In fact the 5 year bright line introduces negligible improvement on the 2 year one, which was designed to clear doubts about the flimsy and murky taxing-by-intention regime we have at IRD and to force and clarify already existing laws ...so that was useful and clear ....

If the IRD and the Treasury are not that happy with the extension, then they won't be happy with the CGT either as it will surely, in addition to their reasoning now, will drive property prices up and be an inflationary step with a lot of undesirable consequences. Surely this has no effect whatsoever on house affordability, as put politely by the IRD.

CGT excluding family home will certainly burn the investment property market along with its rents - - whether we like or not, the consequences will be a rise in all property prices .. i.e benefits homeowners twice and reck the rental industry ..actually the renters not so much landlords. so definitely inflationary domino effect -
how could we mention affordability and CGT in one useful sentence ?...

This Gov is stuck with its campaign promises and it seems that it doesn't have the courage to back off or correct the path from even the most stupid ones ... they keep repeating the word "affordability" in every other sentence thinking that people are still numb and will be fooled with this rhetoric as the tide goes down and no useful or real plans have been yet made public -

NZ universities are unhappy with the useless first year fee free policy, IRD & Treasury warn as above, Lawyers and REINZ are unhappy with foreign buying/investment policy which is being watered down by PT as we speak, the 100,000 kiwibuilt , possibly growing to 500,000 by a jolt of a statement is getting nowhere in a hurry and by the time it does , affordability will be stretched to a breaking point, Infrastructure was put in Intensive Care Unit until we find some fools to take all the risk and build what we need as the Gov realised it doesn't want to write endless cheques every month.... PM is about to sign a $1B prison expansion when Kelvin Davis promised to do otherwise and Mr. Little sees sentencing law relaxed and a rejection of "tough on crime" policies , Leading academics challenge Jacinda Ardern over mega prison ... it is only Feb 2018 !!
Geez, and so far we had just one Cyclone Gita ... God forbid we have anything similar or worse !!

NZ voters will take stock in 2.5 years and count what this Gov has achieved on the main scorecards which gave them the chance and brought them to power and that is Housing, Transport, Health, and Equality .... Voters only give Labour a second chance when they dilituted the CGT issue and threw it on the Tax Group back burner , kicking the can down the road to 2020.

It will need a brave man and a horse to table CGT in 2020 elections , even if it was suggested or recommended by the said Tax group which is stranded with terms of reference leading to one obvious outcome.

Oh, and just before anyone comments on this blaming and slagging National off dadada, as usual, -- I say this lot promised the earth and won, it is time to prove they can walk the talk and worthy of the votes and trust of NZers - they have the money and the power to do that .. We need to see some action not silly rhetoric and excuses.

What we have is a system where Party A is governing and we eventually get frustrated with them. So we elect Party B. Then we give Party B a few years and then get frustrated with them. Same old. Then Party A gets a new leader and we convince ourselves Party A with new leader is what we need.

So round and round we go with no real change occurring.

The only way I can see of getting meaningful progress is through a disruptor. Which is why I voted TOP.

Agree which is why I joined and voted as such, and we got no where. I mean 2.5% when the loony Conservative party could get 4% ish should tell you a lot about how pointless it is to try and achieve change.

I don't see CGT increasing house prices, market forces control what you can sell the property for when you decide to sell.

CGT will reduce the net gain you make, but if you are a property investor (long term or short) you are in the property business and when you make a profit in business it is taxed.

How the property investor reacts would depend on their specific circumstances.

On balance I think given the situation in New Zealand any government would be sensible to introduce CGT on housing (excluding the family home) but who ever did would most likely be punished by ma and pa investors who think they are missing out. If Labour want to do it they should do it now, they then have 2 ½ years for people to forget about it / get distracted by the next controversy.

CGT will not be introduced - the 5 year brightline is perfect - will force flippers who were never true investors to pay tax and keep property prices in check. No need for IRD to spend too much time on it as the rules are clear - buy and sell in less than five years and the brightline capital gains tax that National put into place will ping you for tax. Most property investors I know have no problem with it as they are all long term holders and it doesnt have any impact on them

If you do not sell the property as a means of income for you in retirement and your family for years to come, then CGT is a non issue. Any speculation should be taxed accordingly. Not selling and you don't lose on tax/agent commissions, which erode a healthy equity and leverage position.

If they put the money in the bank, they get paid interest (which they pay tax on) and no increase to cover any inflation.

If they buy an investment property they can rent it out (make say 3%) and if it increases in value they make a profit and pay tax on the profit. Typically they are leveraged so even if the property only increases at the rate of inflation they gain more than what would have been the inflated value of their own money. Anyway they should make a profit, so they can afford to pay tax on it, same as any business.

Ideally for NZ, investors would change from putting all their wealth into unproductive assets and invest in productive assets; businesses, etc. helping to create more jobs etc. which will ultimately make NZ (and their investments) better off.

In many countries capital gain is taxed at a much lower rate than income tax so as not to be too distortionary.
But the real problem woth CGT, is that anyone with a bit of money will look at the market and decide that the most tax effecive way to invest is not into investment property but into their own home, as its guaranteed tax free.
Most countries that have CGT, see vast amounts spent on home improvements where run down dungers are turned into palaces. Why? Because investors take the path of least resistance. That wil be the problem here if a full CGT is introduced.

Not sure how modernising the existing housing stock is a bad thing in and of itself. I guess if it stops developers from bowling a 1960s rotbox on a quarter acre and building a row of townhouses it would limit intensification, but it shouldn't be too hard to deal with subdivision in a way that capital gains doesn't kill the viability.

I've decided that since we clearly do not need a CGT, we must need the opposite - a CGS (Capital Gains Subsidy)

As a home investor I would put the CGS as an annual capital gains topup that guarantees me 6% annual gain.

What I really mean to say is that a CGT would be very different to your annual income tax rate, and differently structured. I think media statements don't explore this or restate this nearly enough. To say that voters will not accept it is frustrating, because voters might accept a tax that accounts for something small, like 1% of their profit from a timely sale.
If we could introduce CGT as a tool and not a tax, a tool to be adjusted as the market requires it, perhaps voters are ready for it?

I don't recall gst having many fans. But the govt of the day (Labour by the way) did it anyway and introduced a gst superior to anywhere in the world. Regardless of what one might think of its's 'fairness', it is simple to operate, low compliance costs and does not have the loopholes like the crazy Aussie system.

The lesson? Get on and introduce a comprehensive land tax and be done with it. No exemptions, across the board. We have had 9 years of uselesssness already.

You do not state the obvious. Capital gains tax was going to be something like 15% but the Brightline tax is at full tax rate. Those people flipping houses should have always paid the full tax on their earnings / profits. I was offered a house and income to buy this week. Buyer had paid $460,000 for it in December 2017. He gave it a quick blow job to remove the Meth contamination, and is now two months later asking for $560,000. I sure would love to see the vendors tax return. He has done nothing wrong. Just a smart operator. Like the hare and the tortoise. What is the bet I would pay more tax than him.

The point is often missed, and I think the author has missed it too. CGT is a tax on windfall profit, not on the full sale. So the mythical surviving partner would stiil be in profit if the house price has risen enough to cover costs. CGT can be argued to be unfair when it is applied on an owner occupied home as it erodes the capital which would be used to help finance a new home, forcing young families to borrow so they can give the government cash. And really, CGT should give tax credits where a loss is incurred if it is to be a fair fiscal instrument.